You're Better Marketers After All

Farmers sell two-thirds of their crop in the bottom third of the price range. Is this statement, which you've undoubtedly heard many times, true or false?

Flat out false — nothing more than a myth — according to a new study by University of Illinois economists that examined how average prices farmers receive compared to market averages from 1973 to 2003.

“Our data shows that farmers are much better marketers than has been commonly thought,” says Darrel Good, one author of the study. “Our overall conclusion is that they don't do too bad a job.”

The results of the study show that “the average price received by producers falls mostly in the middle,” comparing producer prices to average market prices, Good says.

That said, the price producers receive on average for corn and soybeans is lower than market averages, but barely, amounting to no more than $5-10/acre, Good notes. Thus, marketing is not the major factor influencing net farm income as has been commonly assumed.

The study by Good, along with Lewis Haledon, Scott Irwin and Evelyn Colino, says “It's startling that widespread beliefs about marketing performance of farmers are not based on a large body of evidence.”

Two other studies have been done of farmer marketing performance. One of them, a 10-year Kansas study, found that price was not a statistically significant component of a producer's profit function. The other, an Indiana study, found that soybean growers who made spot sales at harvest and those using preharvest forward contracts received higher prices during the 1981-1984 marketing years than those who waited until late in the crop year to sell.

The new study that examined corn and soybean marketing in Illinois from 1973 to 2003 used two measures in the analysis.

The first was based on USDA's average producer price received series, while the second was based on spot cash market prices. Benchmarks for evaluating the performance of farmers included the same 24- and 20-month market benchmarks used in the Agricultural Market Advisory Service performance evaluations of market advisory services as well as a 12-month post-harvest average cash price benchmark and a harvest cash price benchmark. Given measurement issues associated with the USDA average price series, two alternative farmer benchmarks were also constructed for this study.

The results show that in nine of 12 comparisons across corn and soybeans, the most frequently occurring outcome is for farm prices received to fall in the middle third of the price range. Across all 12 comparisons for corn and soybeans in the study, 16% of the average farm prices fell in the top third of those paid by the market, 61% fell in the middle part of the range, and 23% fell in the bottom third of the price range.

“Therefore, while there is evidence that producer prices received do not always fall in the middle or top portion of the year's price range, the results refute the contention that Illinois farmers routinely market the bulk of their crop in the bottom portion of the price range,” the study says.

While farmers are better marketers than many have thought, there is room for improvement, Good says. One way to do that would be to sell crops earlier in the year. The study shows that for both corn and soybeans, prices tend to decline after July and August, so farmers are punished by holding crops for sale beyond those months.

“On average, farmers are passing up the opportunities of preharvest sales” when prices are higher, Good says.

One final question the study looked at was whether marketing performance has improved over time. The study of 31 years found “no evidence that aggregate marketing performance of Illinois corn and soybean producers has changed over the last three decades.”

Better At Beans Than Corn

Farmers are better soybean marketers than corn marketers, according to a University of Illinois marketing study. Across six comparisons for corn, farmers hit the top third of the average market price range 13% of the time, 56% in the middle range and 31% of marketings were made in the lower third.

For soybeans, however, the comparable averages were 18% in the top price range, 67% in the middle and 15% of average marketings were made in the lower third of the price range.

As a result, nearly all of the $5-10/acre average reduction in farmer marketings vs. market averages is from corn. It's not only farmers who are better at marketing soybeans vs. corn, says University of Illinois Economist Darrel Good. The track record of farm marketing services is also better for soybeans than corn.

Good isn't sure why farmers are better at marketing soybeans than corn. But he says one reason might be that preharvest corn prices average 4¢/bu. higher than harvest prices, while preharvest soybean prices average 3¢/bu. lower than harvest prices. Post-harvest prices (after storage costs) for corn average 12¢/bu. lower than harvest prices, while post-harvest prices (after storage costs) for soybeans average 17¢/bu. lower than harvest prices. So farmers are penalized for no preharvest pricing of corn, but not for soybeans.

How Farmers Fare Vs. The Market

Corn

Soybeans

Top third (of average prices)

13%

18%

Middle third

56%

67%

Bottom third

31%

15%

The above chart, based on six different comparisons, shows the ranking of prices received by Illinois farmers compared to average market prices from 1973-2003. The chart shows that farmers are considerably better soybean marketers than corn marketers. Source: University of Illinois Department of Agricultural and Consumer Economics.